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Late-stage health tech venture investment will continue to slow in 2023, a report from SVB on health-care investments and exits predicts.

Why it matters: Venture funds have raised over $50 billion for health care in the last two years — and that money has to go somewhere, Claire writes.

By the numbers: Later-stage deal sizes shrunk in 2022, with only 18 deals worth more than $200 million, compared with 44 in 2021.  

Health tech had the largest step-up multiples in early-stage deals, seeing a median step-up of 2.9x from seed round to A round, and a 2.4x step-up from A round to B round, in the first half of last year. 

SVB calculated 13 Series B step-ups where the post-money valuation was $200 million or more. 

Zoom in: Of the 206 health-tech companies that raised a Series A in 2020, just 92 of those raised a Series B in 2022.

Of the 247 health tech companies that raised a Series A in 2021, only 58 raised a Series B in 2022.

Between the lines: At the Series B stage, investors want to see well-proven unit economics and a path to profitability, with more pressure on companies to demonstrate a robust pipeline of commercial contracts, the report says. 

What's next: Look for an increase in extension, bridge and insider rounds, giving companies more wiggle room to meet milestones that later-stage investors look for.

SVB predicts an increase in larger, outsider-led rounds in the second half of next year, but notes many will be down rounds. 

1 big thing: Late-stage investment lags

Illustration of a health plus-shaped price tag with dollar signs printed on it.

Hospital streamlining software developer LeanTaaS acquired clinical workflow automation provider Hospital IQ, CEO Mohan Giridharadas tells Erin exclusively.

Why it's the BFD: The combined entity is worth more than $1 billion, creating one of the largest providers of hospital efficiency tools at a time when health systems face a major labor crisis and financial strain.  

Deal details: Kirkland & Ellis served as legal advisor on the transaction, which comes just months after Bain Capital's June acquisition of a majority stake in LeanTaaS. 

"Almost immediately after that acquisition, we started that conversation [with Hospital IQ CEO Rich Krueger], and it grew organically," Bain Capital managing director Paul Moskowitz tells Erin.

State of play: Amid high demand for automation in health care, a number of companies have attracted significant investor interest, with businesses offering tools including those for patient scheduling, clinical workflow and capacity prediction.

Tebra, the result of a tie-up between medical software developer Kareo and health care marketing company PatientPop, in July raised $72 million at a $1 billion+ valuation.

Notable Health, which sells "digital assistants" to perform manual and repetitive work for clinical staff, in 2021 collected $127 million in Series B funding with support from Microsoft CEO Satya Nadella.

Rhyme (FKA PriorAuthNow), which offers software for streamlining treatment approvals, last February pulled in $25 million in Series B capital.

How it works: LeanTaaS and Hospital IQ offer hospitals predictive tools to monitor resource use and reduce patient delays, maximize revenue and deliver better care.

Newton, Massachusetts-based Hospital IQ is focused on staff, while Santa Clara, California-based LeanTaaS is focused on assets, such as machines and rooms.

The combined company will service more than 180 health systems and clinics and roughly 600 to 700 hospitals, Giridharadas says.

Our big question: Last year was predicted to be a banner year for digital health M&A but failed to meet most industry observers' expectations. Could this early blockbuster deal suggest those predictions weren't wrong, just early? 

2. The BFD: LeanTaaS acquires Hospital IQ

Illustration of a stethoscope made from a coin.

CVS Health (NYSE: CVS) is exploring a takeover of Chicago-based Oak Street Health (NYSE: OSH), a Medicare-focused operator of a network of value-based primary care centers, per Bloomberg. A deal could be valued north of $10 billion, including assumed debt.

Why it matters: If the talks are indeed serious, the deal would add further fuel to the fight to own primary care. 

Details: Oak Street had nearly a $5.5 billion market cap at yesterday's market close, with shares way up at this morning's open. Major shareholders include General Atlantic (25.27% stake) and Newlight Partners (13.4%). 

An acquisition of Oak Street would give CVS access to 169 U.S. centers that serve nearly 160,000 patients.

Be smart: Not much materialized after CVS was reportedly in exclusive talks to acquire Cano Health in the fall. 

Not to mention, the pharmacy giant hasn't closed its planned $8 billion acquisition of Signify Health yet. 

3. CVS eyes Oak Street Health

A perfect storm of rain, viruses, and skyrocketing hotel costs did little to deter CEOs and investors from Day One of the J.P. Morgan Healthcare Conference.

Why it matters: Despite observer predictions that November's glitzy HLTH conference in Las Vegas might steal JPM's thunder, suits filled the Westin St. Francis to the point of overflowing — not with water, but with people.

By the numbers: The conference drew an estimated 8,000 attendees Monday, per the San Francisco Chronicle, down roughly 20% from pre-pandemic levels.

What they're saying: "There's still no better event on the calendar to connect with the people enabling health care," Included Health CEO Owen Tripp told Erin on Monday.

The intrigue: Most executives told Erin they weren't at JPM to fundraise but rather to meet with potential partners.

Jasper Health CEO Adam Pellegrini, who typically makes the trek to Las Vegas for CES, skipped that show this month to visit JPM because "the health plans are here," he said.

Yes, and: Historically, much of JPM's action has occurred outside the conference itself at luncheons, happy hours and panels timed to coincide with official company presentations, and this year is shaping up to be no exception.

A 120/80 lunch event on Monday with Cityblock CEO Toyin Ajayi, Included Health CHO Ami Parekh and Town Hall Ventures general partner Andy Slavitt drew roughly 60 guests, who gathered for a reality check on the state of health care, with panelists noting that for the first time, life expectancy is declining while health care spending  grew 2.7% to $4.3 trillion in 2021.

What's needed from digital health companies first and foremost, per Ajayi: "Aligning business models with health outcomes."

4. Overheard at JPM

Illustration of a procession of lobbyists with suitcases

Wisdo Health, a New York, N.Y.-based peer support network focused on reducing loneliness, has raised an additional $5m in Series A funding, bringing total Series A funding to $11m. Marius Nacht, Alive Israel Healthtech Fund and Bridge Builders Collaborative led the round; Anne Wojcicki and Avram Miller joined. 

Porter, a Miami-based home care startup, has raised $5.4m in seed funding led by Grit Capital Partners, Old Line Capital and JLC Family Office. https://www.helloporter.com/ 

QHP Capital has invested in Copilot, a Maitland, Fla.-based health care hub services platform. www.cmcopilot.com

Thirona, a Netherlands-based AI-powered lung and retinal image analysis company, has spun out its retina division as Thirona Retina BV. https://thirona.eu/news/ 

5. Deals o' the day

Jukebox Health has named former Medly director of provider support Jennifer Oliver VP of operations.

Wisdo Health has named Alive VC managing general partner Michel Habib to its board.

Ascend Learning has named former Olive AI SVP of operations Steven Giangregorio VP of operations, health care group.

Jason Shafer has joined health care VC firm Council Capital, after more than five years with EyeSouth Partners.

Healthy.io has named former Amazon Pharmacy senior BD of commercial markets Justin Garrett VP of U.S. payer sales.

Found has named former Cricket Health SVP of clinical operations Dianna Budgeon EVP and head of clinical operations.

6. It's Personnel

It's Tuesday, Health Techies, and there's lots to dive into. Let's go. 

☔ Situational awareness: JPM marches on, and Erin shares what she saw on Day One in the sodden City by the Bay. Say hello if you see her today!

🌂 Erin survived Day One of JPM without getting soaked.

❤️ Thanks for reading, and extra thanks to newsletter editor George Moriarty and copy editor Brad Bonhall. Please ask your friends and colleagues to sign up.

January 10, 2023

1 big thing: Late-stage investment lags